Question

Canglon, Inc., issues 10%, 5-year bonds with a face value of $150,000 when the effective rate is 12%. Interest is to be paid semiannually on June 30 and December 31. Assume Canglon uses the effective interest method to amortize the discount. Prepare calculations to prove that the selling price of the bonds is $138,959.90.

Answer 1

Answer:

Explanation:

Base on the scenario been described in the question, the calculation is done using this method

Particulars

Present value of principal

Add: present value of interest

Selling prices of bonds

Amount (A)

$150,000

$7,500

Present value factor (B)

O.558395

7.360087

Value of the bonds (A × B)

$83,759.25

$55,200.65

$138,959.90

Bond is said to be the long term promissory notes issued by company as the the lend money from investors to raise money that will be use in financing their operations.

Answer 2

Answer:

$ 138961

Explanation:

Bonds value= $150,000

Time of the bonds= 5 years

Interest are paid semi annually, hence 5 years of which payment are paid twice in a year= 10 payment in total

Interest rate of bonds= 10% (meaning 5% per payment)

Effective of bonds= 12% (meaning 6% per payment)

Actual interest to be paid

150,000 x 5/100 = 7500

To get the present value, we will use the effective rate of 6%

-Present value of Bonds of face value $150000 = 150000 x 0.5584= $83,761

-Present value of interest of $ 45000 = 7500 x 7.3601= $55,200

Total present value of bonds

=$ 83760 + $ 55200= $ 138961

The bond is a debt security, under which the issuer owes the holders a debt and (depending on the terms of the bond) is obliged to pay them interest (the coupon) or to repay the principal at a later date, termed the maturity date.